One consequence of the labor share decline has raised concerns. Since labor
income is more evenly distributed across U.S. households than capital income,
the decline made total income less evenly distributed and more concentrated at
the top of the distribution, and this contributed to increase income inequality.
In this Commentary, we look at how the labor share decline has affected
income inequality in the past, and we study the likely future path of the labor
share and its implications for inequality.

The Decline in Labor’s Share of Income

Household income comes in two types: labor income, which includes wages,
salaries, and other work-related compensation (such as pension and insurance
benefits and incentive-based compensation), and capital income, which includes
interest, dividends, and other realized investment returns (such as capital
gains). During the last three decades, labor’s share of total income has
declined in favor of capital income (see “Behind
the Decline in Labor’s Share of Income” for more detail).

There are a number of ways to measure the share of income that accrues to labor.
We look at three different data sources, and each provides broad evidence of the
decline. According to data from the Bureau of Economic Analysis, labor’s share
of gross national income fluctuated around 67 percent during the 1980s, 1990s,
and early 2000s, but it has declined since then and now stands at 63.8 percent.1
(See figure 1.) According to the Bureau of Labor Statistics, the ratio of
compensation to output for the nonfarm business sector fluctuated around 65
percent until the early 1980s and has declined steadily since, from 63 percent
during the 1980s and 1990s to 58.2 percent most recently. Finally, a 2011 study
of income tax returns and demographic data by the CBO (CBO 2011) finds that
labor’s share of income decreased from 75 percent in 1979 to 67 percent in 2007.

These three data sources measure slightly different labor share concepts, which
is why their estimated levels are different. But they agree in indicating a
significant drop of 3 to 8 percentage points in labor’s share of income since
the early 1980s, with the trend accelerating during the 2000s.

Such a decline had implications for the distribution of incomes. Labor income is
more evenly distributed across U.S. households than capital income, while a
disproportionately large share of capital income accrues to the top income
households. As the share that is more evenly distributed declined and the share
that is more concentrated at the top rose, total income became less evenly
distributed and more concentrated at the top. As a result, total income
inequality rose.

Income Inequality

Income inequality is the dispersion of annual incomes across households,
relative to the average household income. Inequality affects a variety of other
important economic variables, such as the composition of consumption and
investment, tax revenue and government spending, government policies, economic
mobility, human capital accumulation, and growth. Some economists—most
prominently Raghuram Rajan in his book Fault Lines—have suggested that
rising income inequality contributed to the debt accumulation and financial
imbalances that led to the recent financial crisis. And of course income
inequality is the focus of much attention as an indicator, albeit imperfect, of
the inequality of lifetime income and welfare across households.

Several indicators suggest that inequality was declining up to the late 1970s,
but it has since reversed course. It rose sharply during the 1980s and early
1990s and currently is at near record-high levels. ... [facts and figures on
inequality, several measures presented] ...

This is a sizeable effect. More importantly, most of the effect occurred during
the last decade, when the decline in the labor share was accelerating. Is this
trend going to continue, and how will it affect income inequality going forward?

Future Paths

We use the model described in box 2 to learn about the future path of the labor
share. The model decomposes the labor share into its long-run trend and its
transitory components, and then it forecasts the future path of the overall
labor share. We do all the calculations twice, once with the BEA data and once
with the BLS data.

According to our model, the labor share trend has declined since 1980, with an
accelerated drop in the 2000s, in both sets of data (figure 4). In the BEA data,
the trend declined from levels as high as 69 percent before 1980 to 66.9 percent
in 2000, to 64.9 percent today. In the BLS data, the trend declined from levels
of approximately 64.5 percent before 1980 to 62.8 percent in 2000, to 59.8
percent today. According to these measures, the trend in the labor share
declined 1.5 to 2 percentage points between 1980 and 2000, and then dropped an
additional 2 to 3 percentage points, for a total of 4 to 4.5 percentage points.

Our model indicates that the labor share is currently 1 to 1.5 percentage points
below its long-run trend level. Part of the decline in the labor share in the
past five years was temporary, and it will be reversed as the recovery
continues. Going forward, the labor share will pick up and converge to its
long-run trend value. This will tend to decrease income inequality, lowering the
Gini index by up to 0.5 (0.33 × 1.5) percentage points, as the decomposition in
box 1 indicates.

Income inequality will not necessarily decrease though. As shown in box 1,
inequality is affected not only by the relative shares of labor and capital
income, but also by the concentrations of each. Concentration refers to the way
each type of income is distributed across the households that earn it. In
particular, concentration indexes measure how concentrated capital or labor
income is at the top of the income distribution.

The future path of labor concentration is hard to predict, as it depends on the
evolution of the returns to education and of the wage-skill premium. The
concentration of capital income, however, is strongly procyclical, rising during
recoveries (figure 5), and this suggests that capital income will become more
concentrated at the top in the coming years of the recovery, helping to raise
income inequality even further. This effect has dominated the dynamics of income
inequality during the past two business cycles, so the future path of income
inequality will likely be determined by the strength of the recovery and the
associated pickup of the concentration of capital income.

One consequence of the labor share decline has raised concerns. Since labor
income is more evenly distributed across U.S. households than capital income,
the decline made total income less evenly distributed and more concentrated at
the top of the distribution, and this contributed to increase income inequality.
In this Commentary, we look at how the labor share decline has affected
income inequality in the past, and we study the likely future path of the labor
share and its implications for inequality.

The Decline in Labor’s Share of Income

Household income comes in two types: labor income, which includes wages,
salaries, and other work-related compensation (such as pension and insurance
benefits and incentive-based compensation), and capital income, which includes
interest, dividends, and other realized investment returns (such as capital
gains). During the last three decades, labor’s share of total income has
declined in favor of capital income (see “Behind
the Decline in Labor’s Share of Income” for more detail).

There are a number of ways to measure the share of income that accrues to labor.
We look at three different data sources, and each provides broad evidence of the
decline. According to data from the Bureau of Economic Analysis, labor’s share
of gross national income fluctuated around 67 percent during the 1980s, 1990s,
and early 2000s, but it has declined since then and now stands at 63.8 percent.1
(See figure 1.) According to the Bureau of Labor Statistics, the ratio of
compensation to output for the nonfarm business sector fluctuated around 65
percent until the early 1980s and has declined steadily since, from 63 percent
during the 1980s and 1990s to 58.2 percent most recently. Finally, a 2011 study
of income tax returns and demographic data by the CBO (CBO 2011) finds that
labor’s share of income decreased from 75 percent in 1979 to 67 percent in 2007.

These three data sources measure slightly different labor share concepts, which
is why their estimated levels are different. But they agree in indicating a
significant drop of 3 to 8 percentage points in labor’s share of income since
the early 1980s, with the trend accelerating during the 2000s.

Such a decline had implications for the distribution of incomes. Labor income is
more evenly distributed across U.S. households than capital income, while a
disproportionately large share of capital income accrues to the top income
households. As the share that is more evenly distributed declined and the share
that is more concentrated at the top rose, total income became less evenly
distributed and more concentrated at the top. As a result, total income
inequality rose.

Income Inequality

Income inequality is the dispersion of annual incomes across households,
relative to the average household income. Inequality affects a variety of other
important economic variables, such as the composition of consumption and
investment, tax revenue and government spending, government policies, economic
mobility, human capital accumulation, and growth. Some economists—most
prominently Raghuram Rajan in his book Fault Lines—have suggested that
rising income inequality contributed to the debt accumulation and financial
imbalances that led to the recent financial crisis. And of course income
inequality is the focus of much attention as an indicator, albeit imperfect, of
the inequality of lifetime income and welfare across households.

Several indicators suggest that inequality was declining up to the late 1970s,
but it has since reversed course. It rose sharply during the 1980s and early
1990s and currently is at near record-high levels. ... [facts and figures on
inequality, several measures presented] ...

This is a sizeable effect. More importantly, most of the effect occurred during
the last decade, when the decline in the labor share was accelerating. Is this
trend going to continue, and how will it affect income inequality going forward?

Future Paths

We use the model described in box 2 to learn about the future path of the labor
share. The model decomposes the labor share into its long-run trend and its
transitory components, and then it forecasts the future path of the overall
labor share. We do all the calculations twice, once with the BEA data and once
with the BLS data.

According to our model, the labor share trend has declined since 1980, with an
accelerated drop in the 2000s, in both sets of data (figure 4). In the BEA data,
the trend declined from levels as high as 69 percent before 1980 to 66.9 percent
in 2000, to 64.9 percent today. In the BLS data, the trend declined from levels
of approximately 64.5 percent before 1980 to 62.8 percent in 2000, to 59.8
percent today. According to these measures, the trend in the labor share
declined 1.5 to 2 percentage points between 1980 and 2000, and then dropped an
additional 2 to 3 percentage points, for a total of 4 to 4.5 percentage points.

Our model indicates that the labor share is currently 1 to 1.5 percentage points
below its long-run trend level. Part of the decline in the labor share in the
past five years was temporary, and it will be reversed as the recovery
continues. Going forward, the labor share will pick up and converge to its
long-run trend value. This will tend to decrease income inequality, lowering the
Gini index by up to 0.5 (0.33 × 1.5) percentage points, as the decomposition in
box 1 indicates.

Income inequality will not necessarily decrease though. As shown in box 1,
inequality is affected not only by the relative shares of labor and capital
income, but also by the concentrations of each. Concentration refers to the way
each type of income is distributed across the households that earn it. In
particular, concentration indexes measure how concentrated capital or labor
income is at the top of the income distribution.

The future path of labor concentration is hard to predict, as it depends on the
evolution of the returns to education and of the wage-skill premium. The
concentration of capital income, however, is strongly procyclical, rising during
recoveries (figure 5), and this suggests that capital income will become more
concentrated at the top in the coming years of the recovery, helping to raise
income inequality even further. This effect has dominated the dynamics of income
inequality during the past two business cycles, so the future path of income
inequality will likely be determined by the strength of the recovery and the
associated pickup of the concentration of capital income.